Value – Diane Coyle

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Introduction – Value

“Do we value only the things that have a monetary price? Of course not. People put much higher value on the non-monetary, on love, on health and happiness, on an evening spent with friends, on music, on sunlight and a delicious breeze, the sound of the sea, a favourite corner to curt up at home, a beloved pet.”

Yet there is a profound ambiguity about whether or not value is money and money value. The word itself and all its synonyms in English express both meanings. ‘Value’ derives from the Latin word for strength, or standing. We can treasure something with no market price, but ‘treasure’ conjures up a pirate hoard of gold doubloons. To ‘cherish’ or hold dear is from the French cher, which means expensive.

Then there are values, because this is an unusual word whose plural carries a completely different meaning from its singular. Values are not always valued, either: certain values can be either positive or negative depending on your perspective. Values are a core part of the good life well lived, but they can be misguided, old-fashioned, or just different. The values that are admired change over time. Honour and glory once mattered much more than they do now, Victorian values are no longer widely shared, while values we admire greatly – such as tolerance for other world views, or promoting the rights of children or animals – would have seemed bizarre to any Victorian. Values are not measured in euros, dollars or pounds, but their index goes up and down.

“It is even hard sometimes to recognise our own values.”

It is easy enough to name some important values, such as tolerance or integrity or truthfulness, but in everyday life values are revealed by specific events. Sometimes our claim to uphold some values can be tested by daily irritations – it is hard, for example, to be tolerant of everyone all the time in the midst of the frictions of a big city.

So there is a boundary between the moral and the monetary, between ideals and life, but it is not clear and it shifts over time. How can we make sense of value? Repugnant markets

1. Repugnant markets

One route into the question of where the boundary lies between market and moral value is by asking what it is right to buy and sell. This too is a boundary that changes.

“Not all that long ago in human history it was considered normal to buy and sell human beings.”

Slavery is outlawed, at least formally, everywhere now (although it still exists in the illicit modern form of people trafficking). On the other hand, there are markets for trading carbon dioxide or sulphur dioxide emissions, unimaginable just a few decades ago. There is a vigorous debate in many countries about which services should be funded by taxes and provided to all citizens as a right by the government and which should be in the market, whether that is healthcare in Britain or water supply in India.

The Harvard philosopher Michael Sandel struck a chord with many people with his book What Money Can’t Buy: The Moral Limits of Markets. It was published in the aftermath of the financial crisis, before any sign of an economic recovery taking firm hold, and amid a widespread sense of distaste with the conspicuous consumption that characterised the mid-2000s boom. The book was one of the texts of the Occupy movement, but many people who wouldn’t dream of taking to the streets to protest were inspired by it too.

For Sandel makes a powerful case that the spread of market values has undermined the moral values that make a democratic market society possible. He argues that there are many arenas in which civic participation or honour should trump any monetary metric. For example, lobbyists should be barred from paying people to stand in line holding their place to get into Congressional hearings.

“If somebody wants to attend the free summer Shakespeare in Central Park, they must similarly queue for it themselves and not pay a student or unemployed worker to do so for them.”

Shops and banks should not be able to buy the rights to name stations or school buildings, Sandel argues. Or rather, he makes an emotional case, one that resonates, but he does not offer a logical explanation of where the market boundary lies. Why is paying somebody for their time spent queuing different from paying someone for their time spent babysitting when you go out to the cinema? Why should a bank not be able to name a school library when all universities are packed with buildings bearing the name of their donors? Is this simply a question of a political or collective decision based on emotional instinct or a shifting social norm, just as the market for slaves was once acceptable, and then was not?

And is the problem the process of market exchange per se or the fact that markets attach prices to everything? Would it be acceptable to barter queuing time for babysitting time? Of course – people who know each other trade favours all the time. But they have to know each other for such a transaction to happen. Is it then the price attached to a deal, or the anonymity, that causes a certain emotional distaste for the kinds of market Sandel describes?

“The distaste often extends to the very idea of economics as the science of the invisible hand.”

Economics seems to have occupied vast swathes of the territory of everyday life. Economists try to explain the most personal choices, such as marriage partners or the number of children in a family, in terms of future income and spending power. A certain school of economics, aptly labelled ‘freakonomics’, uses monetary incentives to explain crime, naming babies, racial discrimination and a whole host of other social phenomena. While economic incentives clearly have some role in these other areas of life, it is not surprising that people are dismayed by the claim that they offer the only or most important explanation.

This matters because markets are often a powerful way of harnessing incentives to achieve desirable outcomes. One example is the market in the United States for trading permissions to emit the pollutant SO2 that causes acid rain, a triumphant success in removing what was once a serious environmental harm. Market processes can also take place without attaching prices, and can deliver outcomes of great non-monetary value. Economists describe these as ‘repugnant markets’ because they are freighted with a negative reaction, but by matching supplies with needs they can bring about great benefits. Markets are information-processing institutions, and although the information is usually summed up in the price, it needn’t be. The best-known example of a repugnant market in action is the New England Kidney Exchange created in 2004 by the economics Nobel winner Al Roth. Most people do not believe human organs should be traded in the market. In 2003, before the kidney market was introduced, there were just nineteen kidney transplants in the US. The number nearly doubled in 2004 and in 2012 there were 443. Before the market existed, donations came only from family and friends, who happened to be a good match. Most of the donations now are from strangers.

“However, although markets and monetary value can be separated, there is no sign that the wider public has stopped challenging the ascendancy of markets and money.”

The surprise bestseller status of Thomas Piketty’s tome Capital in the 21st Century bears witness to that. It has put the question of the great inequality of wealth in the market economies at the centre of public debate, and it underlines another question: what is the point of economic growth if it does not make most people better off? Or if, even worse, growth is actually destroying things many of us value, whether that is the environmental resources consumed to achieve economic growth, or the moral and civic values of a society given over to maximising the increase in economic activity measured at market prices – or Gross Domestic Product, GDP.

2. Money and happiness

Is it enough to measure progress by the rise in GDP? A country’s rising level of income does not bring about a corresponding increase in happiness over time, although this is not all that surprising – after all, higher incomes do not make us proportionately taller either, but GDP growth has, via nutrition, and contributed to increasing average height. Even so, it is impossible to look at China’s extraordinary GDP growth, with income per capita doubling every seven to ten years, without also noting the price paid in air quality, great disparity of incomes or massive consumption of mineral resources.

The trouble with GDP is that it obviously includes many things that are value-destroying.

“Natural disasters are good for GDP growth because of the reconstruction boom afterwards; the destruction of assets and human life is not counted.”

The metric ignores the depletion of resources, the loss of biodiversity, the impact of congestion or the loss of social connection in the modern, urbanised, hustling market economy. The focus on GDP looks at the flow of money in a given time period but without paying attention to the change in the economy’s asset base, whether oil reserves or infrastructure or human capital.

For all these reasons, some people have proposed alternative measures of economic progress. Adam Smith would have excluded all services, which he saw as parasitic on the creation of true value by farmers and manufacturers – especially banking. Simon Kuznets, often described as the ‘father of GDP’, would have preferred a measure that excluded spending
on ‘bads’ such as crime prevention and – in his view – advertising. In more recent times, there have been advocates for environment-adjusted measures, or simply measuring happiness directly by survey.

After all, what could be more straightforward than asking people such a direct question? Could it not bypass the measurement difficulties? This seems appealing, and some governments have introduced ‘happiness’ or ‘life satisfaction’ surveys. But this approach has real limitations. Reported happiness changes very little over time because of a feature of human psychology. We adjust remarkably quickly to changes in our circumstances and revert to the same level of happiness as before. Whether it’s the joy of a lottery win or the catastrophe of being disabled in a car accident, it only takes about two years for people experiencing even a dramatic change in their life to revert to their happiness fixed point. That points to a real drawback of using happiness surveys to evaluate society or the economy, in that they can lead to a kind of fatalism.

“If what we truly value is happiness, rather than any proxy for it such as income, well, there’s nothing much to be done to increase it.”

This takes us back to monetary measures of, or proxies for, value, back to GDP and its inclusion of things that clearly have negative value. On the other hand, GDP also excludes many things that are of huge value to us. It excludes what are known as ‘informal’ economic activities such as housework and caring, and many volunteer activities. The latter now includes large and extremely valuable efforts such as the open source Linux and Wikipedia. The scope of free online activities is now large, but is under-counted in GDP because with no price attached it can’t be valued in money terms. That means Skype and DropBox and Evernote and Acrobat Reader and Gmail, and all the other free services and software, not to mention the biogs, videos and podcasts so many people upload to the web for the interest or entertainment of others.

GDP, in fact, always excludes the full value of innovations. Nathan Meyer Rothschild was the richest man in the world at the time of his death from an infected tooth abscess in 1836;

“An antibiotic that hadn’t then been invented but now costs just $10 would have saved him. How much would he have paid for that dose of medicine?”

Medical innovations obviously transform lives in ways that go beyond any metric. A procedure that saves a life or safeguards the quality of life is literally invaluable. Other kinds of example pack less emotional punch but have been similarly transformative. Consider the computer revolution and all it has brought in its wake, the way the internet has transformed the way we live and work, overturned many businesses and enabled new ones, the access to information now enjoyed by those formerly excluded from it, the globalisation of production and finance. One estimate is that information-processing power increased by between 1.6 trillion and 76 trillion times in the 20th century. Transformational change on such a scale is not captured by economic statistics.

The extent of innovation since the dawn of capitalism has been simply extraordinary, ranging from ballpoint pens to medical procedures, zips, the internet, computers and smartphones, instant noodles, electric cars – driverless cars! Even the apparently trivial innovations are greatly valued. In the TV show The 1900 House, broadcast in 1999, a family agreed to live as they would have a century earlier. The mother, and it was of course her, had a huge extra burden of work, doing the laundry over several days, cooking all meals from scratch, even making some of the family’s clothes.

“At one point she almost walked off the show. The reason? Shampoo hadn’t then been invented and she hated not having clean hair.”

It isn’t just the availability of better kinds of goods and services that makes a difference. It is sometimes said that there is a paradox of choice, that if we’re faced with too many choices we will be psychologically discomforted and less able to choose anything. But even if true for the individual, there are many different individuals in our increasingly kaleidoscopic societies. I’d prefer my supermarket not to carry all those brands when I already know which two kinds of toothpaste I like, but other people have different preferences. The variety of goods and services available in a modern economy has expanded enormously and will become almost infinite with customisable manufacturing and techniques like 3D printing. People take great satisfaction from the opportunity for self-realisation that the vast array of choice in the restless market economy has given them, as well as the greater longevity, better nutrition and health and reduced infant mortality. The way we measure economic activity was adequate in the age of mass production but does not begin to capture the value of self-designed, creative consumption.

Whether it’s excluding the positives or including the negatives, though, the point is that GDP measures monetary value but not the non-monetary. Our well­being, what we value, what enriches our lives, has many dimensions. They are affected by GDP growth but not defined by it. Many economists have argued that it is necessary to translate everything into monetary terms in order to make judgements about the inevitable trade-offs in life, or in economic policy. This is the basis of cost-benefit analysis, attributing a single pound or dollar figure to each side of the equation. This is a logical approach, but it does not tally at all with how we make decisions. In life, we are always making choices between incommensurable outcomes.

Two roads diverged in a yellow wood, And sorry I could not travel both And be one traveller, long I stood And looked as far as I could To where it bent in the undergrowth.

‘The Road Not Taken’, Robert Frost (1874-1963)

3. Vision, values and value

The hardest choices of all involve the uncertain future, where the road ahead vanishes into obscurity. GDP is a measure of economic activity in the market and in the moment. So the key shortcoming of this monetary measure of economic value is that it collapses time and makes us short term in focus. It counts investment and consumption in the same way – an extra hundred dollars spent on shoes or soda counts the same as the same money spent towards a machine tool or delivery van or even education. All money is equal; its purpose doesn’t matter at all to the calculation by which we assess the health of the economy.

“The key measure, GDP, also ignores the accumulation or depletion of assets. If a country runs down its oil and mineral reserves, it counts as a benefit rather than a cost.”

So the future is largely omitted from what we measure and we therefore undervalue it. In fact, in the financial markets the future is – literally – ‘discounted’. In any calculation of future value, the present counts for most and the future has diminishing weight. Studies have repeatedly shown that the time horizon of the financial markets in particular is ever more short term, no longer even extending as far as the next quarter’s company results.

The high-frequency trading future extends only to a few milliseconds. Shaving around 0.006 of a second off the time it takes computer orders to travel from Chicago to a New Jersey data centre where the servers of the Nasdaq exchange are located made it worth investing several hundred million dollars in tunnelling through the Allegheny Mountains to lay the fibre optic cable in a straighter line. Stock market value now literally travels at the speed of light. More than two-thirds of trades in the US equity markets are high­frequency automated orders.

“How has the search for profit so foreshortened our vision? It wasn’t always so.”

The Victorians could not have been more devoted to the market and the making of money. The foundations of modern business were laid in the Victorian era, including some companies that still exist in some form today. It was an age of hard-nosed entrepreneurship, when everything was measurable, and success was measured in profits. Charles Dickens gave us the schoolmaster Mr Gradgrind in Hard Times, a caricature but one drawn from his own experience:

Now, what I want is, Facts. Teach these boys and girls nothing but Facts. Facts alone are wanted in life. Plant nothing else, and root out everything else. You can only form the minds of reasoning animals upon Facts: nothing else will ever be of any service to them. This is the principle on which I bring up my own children, and this is the principle on which I bring up these children. Stick to Facts, sir!

But Dickens argues against Gradgrindism in his description of the Coketown mill:

So many hundred Hands in this Mill; so many hundred horse Steam Power. It is known, to the force of a single pound weight, what the engine will do; but, not all the calculators of the National Debt can tell me the capacity for good or evil, for love or hatred, for patriotism or discontent, for the decomposition of virtue into vice, or the reverse, at any single moment in the soul of one of these its quiet servants, with the composed faces and the regulated actions. There is no mystery in it; there is an unfathomable mystery in the meanest of them, for ever.

Although the term ‘Victorian values’ now speaks to us of characteristics such as narrow-mindedness, hypocrisy, and conformity, it could also speak of hard work, self-improvement, and above all self-sacrifice for the future. For the Victorians had extraordinary vision. The list of their investments in our future is staggering. It includes railways, canals, sewers, and roads; town halls and libraries, schools and concert halls, monuments and museums, modern hospitals and the profession of nursing; learned societies, the police, trade unions, mutual insurers and building societies; companies that planned to last forever and often did survive more than a century.

“They believed in progress and the capacity for improvement by individuals and by societies. They believed in the future and therefore in measuring value over the long term.”

They embarked on projects that a rational calculation would have shown to be delusionally ambitious, whether that was building railways or – in the shape of Charles Babbage and Ada Lovelace – inventing the programmable computer and computer algorithms, held back only by the limitations of the machine
tools of the time. It would take more than a hundred years for their vision to be turned into reality. Why the Victorians managed to be so visionary is not entirely clear, but had something to do with the confidence of an age of discovery both in science and other areas of knowledge, and also in geographical exploration and empire-building. Making such strides against ignorance and the unknown, firm in their sense of divine approbation, a belief in progress seems to have come naturally to them.

“We live now at a time when the financial crisis and its aftermath, and the shift in global economic power from the Atlantic to Asia, and the new technologies starting to threaten livelihoods and the viability of tong-established businesses, are all contributing to a dizzying uncertainty.”

Yet there were civic and business leaders in the late 19th century who had extraordinary confidence and far-sightedness even as they too stood at the centre of a social and economic vortex. You only need to look at the town halls or other civic monuments of the time to see that confidence expressed in stone. We are their beneficiaries still, relying more than a century later on their investments and the way their values shaped their understanding of value.

This Victorian sense of stewardship is something we could usefully remind ourselves of when thinking about how we measure value today. In the late 19th century, which was, like our own times, an era of dramatic change – in technology, in society, in the economy, in global affairs – it was the innovators and the builders of institutions who had standing. The men and women of vision were understood to be the creators of value.

They still are, even if it is often hard to measure or quantify what they build. Anything of value has its roots in values and vision, as much today as at any time in the past.

Diane is Vice-Chair of the BBC Trust and was a member of the Migration Advisory Committee from 2007-2012, and a member of the Competition Commission from 2001-2009. She is also a visiting research associate at the University of Oxford's Smith School of Enterprise and the Environment, and, from September 2014, Professor of Economics at Manchester University. She specialises in competition analysis and the economics of new technologies and globalisation. Diane is the author of several books, including The Economics of Enough (2011), The Soulful Science (2007), Sex, Drugs and Economics (2002), Paradoxes of Prosperity (2001), Governing the World Economy (2000) and The Weightless World (1997). She has also published numerous, reports and articles, and was formerly a regular presenter on BBC Radio 4's Analysis. She was previously Economics Editor of The Independent and before that worked at the Treasury and in the private sector as an economist. She has a PhD from Harvard. Diane was awarded the OBE in January 2009.

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